Salesforce (CRM) Down 2% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for salesforce.com Inc CRM. Shares have lost about 2% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Salesforce First Quarter Fiscal 2018 Results

Salesforce reported first-quarter fiscal 2018 results. The world’s leading CRM platform provider reported adjusted earnings (including stock-based compensation but excluding all one-time items on a proportionate tax basis) of $ 0.06 per share, a penny ahead of the Zacks Consensus Estimate. However, the figure compared unfavorably with the year-ago quarter’s earnings of $ 0.08, mainly due to elevated operating expenses and outstanding number of shares which more than offset benefit from strong top-line growth.

On a GAAP basis, Salesforce reported loss per share of a penny, while in the year-ago quarter it reported earnings of $ 0.06. However, on a non-GAAP basis, the company posted earnings of $ 0.28 per share compared with $ 0.24 reported in the prior-year quarter.

Quarter in Detail

Although Salesforce disappointed on the earnings front, it continued to witness solid growth in revenues. The company’s revenues of $ 2.388 billion not only jumped 24.6% year over year, but also beat the Zacks Consensus Estimate of $ 2.351 billion. Moreover, reported revenues came above the guided range of $ 2.34–$ 2.35 billion. The improvement is primarily attributable to rapid adoption of the company’s cloud-based solutions.

Also, higher demand for the Salesforce ExactTarget Marketing Cloud platform, part of the Salesforce1 Customer Platform, drove the year-over-year upside in revenues.

Among its business segments, revenues at Subscription and Support climbed about 24% from the year-ago quarter to $ 2.201 billion. Professional Services and Other revenues surged almost 32.3% to $ 186.7 million.

Geographically, the company witnessed constant currency revenue growth of 24%, 29% and 36% in the Americas, Europe and Asia Pacific, respectively, on a year-over-year basis.

Salesforce’s adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $ 1.781 billion, up 23.5%. However, gross margin contracted 60 basis points (bps) to 74.6%, primarily due to increased investment in infrastructure development, including the expansion of the international data center.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 26.8% from the prior-year quarter to $ 1.715 billion. This was primarily because of higher investments in research and development, marketing and sales, and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 120 bps to 71.8%.

Salesforce posted adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $ 65.3 million compared with the year-ago figure of $ 89.6 million, while operating margin contracted 200 bps to 2.7%. The year-over-year contractions in adjusted operating income and margin were mainly due to higher costs.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents, and marketable securities of $ 3.22 billion compared with $ 2.209 billion in the previous quarter. Accounts receivable were $ 1.439 billion compared with $ 3.197 million at the end of fourth-quarter fiscal 2017. Total deferred revenue, as of Apr 30, 2017, was $ 5.04 billion, up 26% on a year-over-year basis.

During the quarter, the company generated operating cash flow of $ 1.23 billion. Moreover, Salesforce generated free cash flow of $ 1.073 billion in the fiscal first quarter.

Guidance

Buoyed by better-than-expected fiscal first-quarter results, the company provided an encouraging guidance for the fiscal second quarter and raised outlook for the full fiscal. For the fiscal second quarter, the company anticipates revenues in a range of $ 2.51–$ 2.52 billion (mid-point: $ 2.515 billion), representing a year-over-year increase of 23–24%. Further, the company expects non-GAAP earnings per share in a band of 31–32 cents. On a GAAP basis, the same is anticipated to come between breakeven earnings and a penny.

Furthermore, the company raised its revenues and earnings outlook for fiscal 2018. Revenues are now anticipated to come in the range of $ 10.25–$ 10.35 billion (mid-point $ 10.3 billion), up from the previous projection of $ 10.15–$ 10.20 billion (mid-point $ 10.175 billion), representing 22–23% year-over-year increase.

By completing this target, the company will achieve $ 10 billion mark in revenues faster than any other enterprise software company.

Similarly, Salesforce now projects non-GAAP earnings to come between $ 1.28 and $ 1.30, while GAAP earnings are expected to be in the range of $ 0.06–$ 0.08. This compares with previous guidance range of $ 1.27–$ 1.29 on non-GAAP basis and $ 0.05–$ 0.07 on GAAP basis.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been four revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 11.4% due to these changes.

At this time, Salesforce's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with an 'F'. The stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is suitable solely for growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.

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